Tuesday, April 05, 2011

Investor protection in Hong Kong - some changes needed

With the Lehman mini-bond saga showing signs of continued life in spite of the ridiculously overly generous latest settlement offer from the banks involved, I thought it would be time to set out my list of things which our government and our regulators could do to provide investors with better and more appropriate protection:

1. educate investors on taking responsibility for their own actions - if you don't read or don't understand the product, either don't buy it or don't complain when you lose money. For the most part, while I sympathise with anyone who loses money on their investments, there is no such thing as a risk free investment. If you want to invest you must accept the risk of loss - and this was clearly set out in the offering documents for the Lehman mini-bonds

2. ban derivative warrants - with the existence of the exchange traded options which offer better pricing for investors, there is absolutely no reason for the more expensive warrants to exist. Given the choice, no investor would choose to invest in warrants when options are available

3. require all investment products to have a clear statement of all fees and expenses which are paid in relation to the product - there are still far too many products where this information is not provided

4. abolish the MPF regime - the fees and expenses are simply too high for the current regime to be anything other than wealth destroying for investors. While a mandatory savings scheme is a good idea, it needs to offer more flexibility and lower costs than MPF. Something similar to the Australian or American regimes would be better for investors and, in the long run, taxpayers

5. ban insurance linked investment plans - there is no legitimate reason for such products to exist other than to hide the ridiculously high fees being charged. Why should a product which is demonstrably worse for investors than a combination of term life + a monthly contribution into a low cost fund be permitted to exist? At the end of the day only the ignorant, the stupid and those vulnerable to high pressure selling tactics would ever invest in such a product

6. ban placings by listed companies - placings are always done at a discount and always destroy value for existing shareholders. The inevitable fall in the share price after a placing is announced and the enthusiasm of institutional investors to participate in placings is conclusive evidence of the damage done to shareholders. Absent an insolvency situation, rights issues are the only acceptable way for listed companies to raise additional capital

7. confirm that rights issues by companies listed on overseas stock exchanges do not require registration under the Companies Ordinance - as a shareholder in a number of overseas listed companies I am fed up with some of those companies excluding Hong Kong shareholders from participating in those issues. Being excluded costs Hong Kong investors money

8. require persons selling overseas real estate to confirm that the prices being offered to Hong Kong investors are the same as those offered to local investors - the track record of properties being sold at higher prices in Hong Kong than in their local markets is pretty consistent and pretty awful